Why most Ugandan businesses don’t survive the first five years 

In May 2022 Uganda received an award for being the best investment destination in East Africa.

Shortly after, a survey by Twaweza Uganda, a non-profit, revealed that even when close to half the population had started a business in Uganda, majority failed. A year later, Business Insider Africa drew up a list of the top 10 countries to invest in on the African continent. Kenya, Tanzania, and Rwanda made the cut appearing at numbers 9, 10, and 4 respectively with Uganda a no-show.

This raises concerns about the overall authenticity of the awards and rave Uganda garners as a top-drawer of investment hub since companies continue to divest of the economy year in, year out — Shoprite, Uchumi, Nakumatt, Game Stores, and the like while local businesses get zapped every other day.

This trend shows no signs of slowing down because the economy continues to get battered by internal and external forces which have caused once vibrant local businesses: Biyinzika Poultry International Limited, Dei Biopharma Limited, Sure Deal Beauty Products Limited, and in the past Sembule Group, Bulemezi Farm Enterprises under James Walakira; Greenland bank, and many others to bite the dust.

Which raises the question: why is the failure rate of business high in Uganda? To answer this, a World Bank report — Doing Business in the East African Community 2013 — attributes this nonsuccess to the lack of access to proper information which plays an essential part in the ability of businesses to operate efficiently.

The report states that company and property registries, building departments and power distribution utilities make it difficult to access basic information such as fee schedules for their services.

The document discloses that in only 25 percent of economies do all four agencies make fee schedules easily accessible through their websites, brochures or notice boards, and Tanzania is one of the lower-middle economies that does. No wonder it recently achieved middle-income status!

EFFIGIES AND SHELLS

The World Bank dossier divulges that Tanzania makes more information easily accessible than high-income economies like Greece, Kuwait, UAE. The same cannot be said about Uganda whose institutions are mere effigies and shells. Not to be overlooked are the high interest rates charged by banks in Uganda.

This makes it difficult for firms to borrow for productive investment that is required to achieve high rates of economic growth according to a 2020 study — The Determinants of Interest Rate Spreads in the Uganda Banking System by International Growth Centre.

The report discloses that high lending interest rates have been consistent in Uganda in comparison to Botswana, Rwanda and South Africa because Ugandan banks are highly capitalised which in turn requires a high level of profitability to generate the return on capital that shareholders require.

These high lending interest rates are in part due to high overhead/ operational costs, duplication of infrastructure; that is, every firm having to build, or have its own infrastructure other than share some common infrastructure to reduce costs. And increased government borrowing which puts it directly in competition with the public for credit; this is also called crowding-out.

It is for this reason that Dei Biopharma Limited, a promising half a billion-dollar pharmaceutical company, is presently having its assets auctioned off by, among others, two local banks, before its first production; to recover a loan.

Businesses are collapsing in Uganda because of high tax rates: excise tax, import duties, value added tax [VAT]; and nontariff barriers like delays in the issuance of certificates. VAT is levied at 18 percent in Uganda compared to Kenya’s 16 percent. Excise duty which is charged on goods manufactured internally at the point of manufacture is quite high for businesses operating in an economy the size of Uganda.

As an example, one percent of the value of mobile money transactions is charged as excise duty on top of paying transaction fees, Shs 1,350 for each litre of petrol, and Shs 1,030 for every litre of diesel. Motorcycles at first registration are charged Shs 200, 000 [$54].

This increases the cost of doing business because for example when fuel prices rise, the price of everything shoots up. It goes without saying that the surcharge on motorcycles registered for boda boda business which employs a big part of the informal sector shows the government’s fettering of local businesses.

In an interview with Isa Sekitto, Kampala City Traders’ Association [KACITA] spokesperson, he disclosed that government isn’t responsive to the cries of local businesses, and instead favours foreign ones. He narrated a recent ordeal in which a local businessman almost lost 50 acres of land in Namanve that he had gazetted for a factory complete with equipment to a group of ‘investors’ from Dubai!

FAVOURING FOREIGNERS

Sekitto spoke of the favouritism the government shows to foreign investors: “For example, you start a factory and barely one, two years and they [government] start asking for taxes; many have closed under this.”

“Meanwhile, foreign-owned factories run for five to seven years, and they’re not charged any taxes at all. These Investors are mostly of Indian, Chinese and Pakistani origin”.

It’s because of this that Sekitto believes many local businesses are collapsing despite Ugandans being one of the most enterprising people in the world. Likewise, the unstable macroeconomic environment rampant with inflation, and mercurial international finance dynamics, and exchange rates, make for a deleterious business environment. In the past three years, inflation has hit double digit levels before, during and after the pandemic.

As regards the Uganda shilling, it has dropped against the dollar by six percent since January 2022. This drop in value means that the cost of international trade for Ugandan traders has risen.

A cocktail of inflation and the depreciation of the shilling spells disaster for businesses that many cannot survive especially as inflation increases the cost of doing business, forcing firms to lay off workers to stay afloat. With less people working, the purchasing power in the market is reduced, forcing many businesses to shut down.

Further, many businesses are run by incompetent management teams. If they are lucky, only the boss, and a few sittings at the top have the necessary experience, skills, training and business acumen to run a business successfully. This negatively affects the hiring process. Also, not many businesses possess the financial muscle and knowledge to outsource human resource to fill the void left by ill-equipped personnel.

In the business circles it is common knowledge that to win/get lucrative deals or contracts, the palms of awarding officials must be greased. Non-compliance ends in not winning contracts. Many companies cannot afford the percentage of kickbacks asked for, and at the same time retain capital to operate.

So, they are outbidden by bigger companies that have the capacity hence many medium, and small enterprises get driven out of business because they can’t afford to factor bribes into their expenditure.

A pragmatic look into Uganda’s economy uncovers that its market size/economy is small and weak. Uganda’s economy is categorised as such because it has a weak currency. Most strong economies are backed by strong currencies like Tunisia, Botswana, Kenya and many others on the continent.

Uganda’s economy isn’t productive, and competitive, which explains the rising demand in imports in comparison to exports. In the twelve months leading to November 2022, Uganda had an overall balance of payments deficit of $676.5 million [shs 2.5 trillion] as per the parliamentary budget committee report for financial year 2023/24.

According to the IMF, Uganda’s economy is valued at $46 billion for 2022 with a per capita income of $1,060. This metric measures the productivity per person in an economy, and Uganda’s output per person falls short of that of Kenya $2,269, and Tanzania $1,245.

When an economy is bigger, it is more productive and instinctively in its workings, avails opportunities that would otherwise not exist if it were smaller.

In like manner, strong economies are synonymous with well-paying openings in financial markets and services, information technology, medicine and research and development. Uganda’s economy doesn’t avail these openings in the least.

What is confusing is the purported year-to-year economic growth reported by government and nongovernmental institutions. All while local businesses fall, and foreign ones close shop despite the extra support accorded them by government. This sends a loud message that Uganda isn’t breeding ground for any business to thrive.

kimaona@yahoo.com